How Can Active ETFs Become Disruptive?
Actively-managed ETFs have now been around for more than 2 years with lots of hype and media attention following them. However, in terms in actual numbers, they don’t have much to show for. At the end of September, Active ETFs in the US totalled just about $2.2 billion in assets across 7 issuers. That is nothing but a small drop in the $900 billion bucket that is the US ETF market. Hence, recent debate and discussion has centered on what it’ll take to get these products off the ground and flying high.
McKinsey’s Financial Services Practice came out with a detailed article on the opportunities that are available in the asset management industry today. As one would expect, one of the main opportunities highlighted is the ETF industry, with flows into ETFs being the largest of any major asset class over the past 3 years, according to the report. Flows in 2009 alone stood at $119 billion. The article describes the core advantages of ETFs that have led to this growth and the increasing preference for ETFs amongst fee-based advisors.
But given the amount of competition now evident in the passive ETF space, issuers are looking at Active ETFs as a potential new frontier. However, the McKinsey article highlights several key things that need to be fall in place before actively-managed ETFs can become a truly disruptive trend:
- Regulatory clarity
- Effective structuring/manufacturing methodology
- Compelling incentive structures for advisors
- Something to break inertia of mutual fund investors
Those are indeed the key issues that need to be addressed, with the most important probably being the regulatory clarity necessary from the SEC. Until there is a clear stance from the SEC on these products, actively-managed ETFs will probably continue to be in a limbo as manufacturers take caution in anticipation of adverse regulatory moves outside their control. For good measure though, the article points out that it took passive ETFs more than a decade to get from the $2 billion mark, where Active ETFs stand today, to where they are now.
Another interesting statistic was that a quarter of all firms surveyed by McKinsey were seriously considering entering the ETF market and 80% of these planned to develop or launch active products – even if just as a hedge in case the sector really gains traction. The article concludes by saying that large ETF manufacturers will likely have to maintain a portfolio a diversified products across styles and strategies, not just passive, in order to maintain their market position and dominance.
At least one major ETF provider that has actively-managed ETFs front-of-mind is State Street Global Advisors. When quizzed by Morningstar Advisor, Anthony Rochte – Senior Managing Director at SSgA, pointed to actively-managed ETFs as representing the next chapter in ETF development. He did, however, add the caveat that they will need to establish strong track records before being readily embraced.
Written By Shishir Nigam from ActiveETFs | InFocus Disclosure: No positions in above-mentioned names.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
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